Loan rejections on the rise
Future car buyers, homebuyers, as well as credit card applicants, shut out as Fed increases rates
NEW YORK — The Federal Reserve’s decision this week to raise its benchmark rate for the 11th time, by a quarter-point, could once again send ripple effects across the economy.
Mortgage rates, which have surged since the Fed began lifting rates in March 2022, rose Thursday. So could rates on credit cards and some business loans.
Perhaps no one has felt the pain more than car buyers. It’s not just that sticker prices are way up. Or that lenders have tightened credit standards. On top of all that, steadily higher auto loan rates have elbowed many would-be buyers out of the market.
A study by the New York Federal Reserve has found that 14% of applicants for auto loans were rejected over the past year — the highest such proportion since the New York Fed began tracking the figure in 2013 — up from 9% in February.
Auto-loan applicants, of course, aren’t the only borrowers being turned down in larger numbers these days.
In that same June 2022-June 2023 period, applicant rejections for credit cards, mortgages, mortgage refinancings and higher credit card limits all rose too, according to the New York Fed. Overall, the rejection rate for credit applicants reached 21.8%, the highest level since June 2018.
Here’s a look at what higher rates mean.
Borrowers: Credit card rates are at or near all-time peaks, and mortgage rates have more than doubled in two years.
“No one should expect them to stop rising anytime soon,” said Matt Schulz, chief credit analyst of LendingTree. “Perhaps the scariest thing of all for folks with credit card debt is that interest rates are actually rising more quickly than the Fed is forcing them to.”
The average Annual Percentage Rate on a credit card that charges interest is 22.16%, according to the latest data from the Fed. That’s up about 6 percentage points from the average rate in the first quarter of 2022. The average APR on a new credit card offer is 24.24%, the highest rate since LendingTree began tracking it in 2019.
Auto loans: Many people were already having trouble affording new vehicles before the Fed hike. The average price paid for a new vehicle last month was nearly $48,000 — about 25% above the pre-pandemic average.
Average used vehicle prices have jumped even more: nearly $30,000, 45% more than before the pandemic.
In some cases, even people with good credit are being rejected for auto loans. The problem for them is that with vehicle prices up sharply, the additional burden of higher loan rates — from 4.5% on average in March 2022 to 7.2% in June — has made monthly payments unaffordable.
“I think people are just not able to qualify for the payments,” says Jessica Caldwell, executive director of insights for Edmunds. com.
The average monthly auto payment last month, she said, was $736. Over the life of an average loan — just under six years — a borrower pays nearly $9,000 in interest.
Despite the rising cost burden, auto sales have remained relatively solid as prices have eased slightly and the supply of vehicles has grown.
For the past two months, sales have hit an annual rate of 15 million.